Invest for your family's future: part 2
Savers' confidence in the stockmarket is growing with the British economy on a fast track to recovery. The Bank of England now expects growth this year to reach 3.6%, up from the 2.8% previously forecast. While banks are ensuring savings returns remain stubbornly low, experts maintain investing in equities for the long term is the way to maximise the potential of savings.
Of course, volatility is the very nature of stockmarket investing but a carefully crafted portfolio can absorb such shocks.
We spoke to three couples at the beginning of the year who made New Year's resolutions to revamp their savings plans and overhaul their investment portfolios. In our second meeting, we'll find out how they have been getting on.
THE YOUNG FAMILY
Sophie and Adrian Blythe - Investing to pay off part of their mortgage
Sophie Blythe and her husband Adrian started a savings drive to pay off the capital part of their mortgage at the beginning of the year.The couple, who live in Chelmsford, Essex, with their children Finley, four, and Harriet, eight, have been saving what they can spare – £100 a month. But this is soon to increase after some good news.
Sophie, 39, who was working three days a week as a project manager at a charity is soon to start a new job at a university as a development manager. Crucially, it is a better-paid job which means she can put more money away.
Sophie says: "My new salary is a little higher so we can afford to save a bit more. I haven't worked out quite how much yet."
Later in the year, the couple will be able to save even more again when their childcare costs will fall. They currently pay £600 a month for Finley. "But when he goes to school full-time in September, we will free up all that cash, which we plan to save. We are looking forward to building up a substantial investment portfolio that we can spend on paying down the mortgage. We might also have a bit of work done on the house."
Sophie and Adrian, 39, a paramedic, are invested in the M&G Global Dividend fund. The manager focuses on companies that can consistently grow their dividend yield rather than those that simply pay a high yield. The fund is actually down around 5.7% over the last quarter. But Sophie's investment is up as she's a monthly saver and benefits from pound-cost averaging, which means buying more units when prices have fallen, less when prices have risen, so the investment is less volatile.
Sophie says she has made about 26% over the past few months. "It's a good return and I am happy with the way the investment is going," she says. "We invest through broker Chelsea Financial Services, which keeps us up to date on what's happening."
One factor that threatens their plans is an increase in interest rates. Sophie adds: "We are on a cheap tracker mortgage, so when rates rise we could have to reduce our savings to make up for the higher repayments."
Alex and Melissa Dudley - Saving for a deposit on a home in London
Alexander and Melissa Dudley, both 29, pledged to spend 2014 saving for a deposit for a house in London, having used a chunk of their savings to pay for their wedding last year.
Alex, a management consultant, vowed back at the start of the year to save at least £1,000 a month into an equity Isa and is a believer in the UK growth story.
He has been buying the Marlborough UK Micro Cap fund and plans to continue. Alex says: "The economy is picking up and the growth figures prove it. I think my decision to invest in Marlborough UK Micro Cap Growth, which has exposure to domestically focused companies was right. These kinds of firms do really well in this kind of environment. I also hold the Henderson UK Property fund, which has exposure to UK commercial property. Both are playing out as I had hoped and I think these sectors will continue to benefit, so I have no reason to sell yet. Small-caps are no longer cheap, so I may rotate out to find value elsewhere – but not yet."
Alex and Melissa's plans to buy their first home could be hindered by the fact house prices are rising rapidly in London.
He said: "The sharp rise in house prices came as a bit of a surprise and I'm concerned about the possibility that interest rates could go up, putting first-time buyers like us under pressure when mortgage rates start going up, too."We don't want to stretch ourselves, so we won't rush into anything but will keep our savings plan going."
David and Tui Messiter - Replenishing their depleted savings
David Messiter and his wife Tui are busy replenishing their reserves after raiding their savings to move from Essex to Norfolk last year. David, who runs his own IT company, moved with Tui who stays at home to look after their daughters Lila, five, and Amelia, two. He pays himself quarterly bonuses, which means he invests lump sums throughout the year rather than having a monthly savings plan.
In January, he put his latest bonus into equities. "I used about £2,500 to fill up my Isa for 2013/14 and the rest will go in when the new tax year starts. I am sticking with the Fidelity Moneybuilder UK Index, which plays the UK recovery well."
David, 40, also feels confident Europe offers opportunities. "As it comes out of the doldrums,
I think there is some serious growth to come. I want to buy more of the Fidelity European Opportunities fund which is mostly invested in Germany and France."
David previously worked for Vodafone and so holds shares as part of its employee package. "I am weighing up whether or not I should sell them. If I do cash them in, I will reinvest most of it. I will, however, use some to smarten up the house. We would like to extend it to add more living space."
David and Tui also save for their children. "Amelia's junior Isa is doing really well but Lila has a child trust fund that is stuck not doing very much." The government has said it will allow those with now defunct CTFs to transfer the money to a junior Isa, which is typically cheaper to run and comes with better investment choices. Yet the change is not expected to be implemented for another 12 months. "As soon as we are able to transfer out of the CTF, we will do so."
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.